Wednesday, 30 August 2017

Today’s post looks at the news that companies that have
built NHS hospitals and associated services over the past six years have
recorded pre-tax profits of £831 million, with a further £1 billion expected to
be made in the next five years. These companies operate under what is known as
the ‘private finance initiative’ (PFI), which can be directly traced back to
John Major’s Conservative Government in 1992, and indirectly
associated with the socially-defining period of Margaret Thatcher’s reign
in the 1980s, a reign which is synonymous with the concept of privatisation.
This almost absolute transference of service provision to the private sector, will be the focus of this post as we look at the
effect that the initiative is having upon the service that the NHS can provide –
assessing where the money that can go
to the NHS actually ends up will be revealing, and perhaps is what should have
been paraded on the side of that infamous
bus.

The issue of providing certain services to the public, and
crucially how best to provide them, has long since been debated and theorised
within a number of academic fields. One of the key approaches that has been
adopted is that of the ‘public
private partnership’ (PPP), which seeks to combine public and private
endeavours to make the provision of a public service, or a ‘public good’, as
efficient as possible. Furthermore, where a service is required but it is
extremely inefficient for the State to provide it, they will often incentivise
private companies to meet that demand – this author has discussed
this at length with regards to Credit Rating Agencies. Yet, it is extremely
important that we define these different endeavours correctly, because PPP and PFI
are not the same thing (arguably, they are not even close). PFI describes a process
whereby a certain service requirement is put out to tender for private
companies, and a local authority will then enter into a long-term contract with
that private company, or collection of companies through a ‘Special Purpose Vehicle’
(a special legal subsidiary that has its own legal status or ‘personality’); those
contracts will usually see the local
authority commit to a certain number of years for a certain amount, which is
theoretically paid based on the performance of the provision of services etc. The
PFI and the PPP are not the same, despite what the British Government say,
because PPPs are usually designed to increase the provision of public goods
without directly drawing from public funds (although this is not an exclusive
characteristic, admittedly), whereas PFI have the ability to draw from public funds
intrinsically interwoven within their creation, which is where the destructive
and disgusting element of this mode of finance can be seen.

The best example of this is the NHS, and the recent news
stories have brought this to the fore. However, they are a persistent problem,
and one that we must acknowledge is of Conservative creation but was expanded
by the policies of New Labour in the late 1990s; the then Chancellor Gordon
Brown expanded their usage greatly as New Labour cemented the incredibly
short-term philosophies that see the country in the mess that it is in now –
the Chancellor was attracted to the ability to ‘buy
now and pay later’, pushing the debt burden onto future generations and off
the governmental balance sheet. It was reported
in 2011 that the British Taxpayer owed a staggering £121 billion on
projects worth only £52 billion, demonstrated the extraordinary profit to be
made from the pockets of the taxpayer. In 2011 there were a number
of scandalous reports concerning PFIs and the NHS, including jobs worth
£750 being charged at £52,000, hospitals costing ten times what they are worth,
and hospitals and schools still recording six-figure revenues for SPVs despite them
being closed. Therefore, it should come as no surprise that reports today suggest
that ‘large
sums that could have been used for patient care have instead gone into the
pockets of a handful of PFI companies’, with analysis from the Centre for
Health and the Public Interest suggesting that not paying the pre-tax profits
between 2010 and 2015 would reduce the massive NHS
deficit by a quarter. The analysis
continues by surmising that the capital value of assets built for
health-related PFI initiatives stands at £12.4 billion, although the NHS will
ultimately pay over £80 billion for their use; this incredible scheme, supposedly,
will end up costing the taxpayer over £300
billion, or £10 billion a year, which is an extraordinary understanding to
comprehend.

Labour MP Stella Creasy has been making the point loud and
clear that there needs to be an urgent
competition enquiry into this particular market, which comes in addition to
her
view that there should be an increased tax on their profits. However, this
viewpoint has been excellently critiqued by one commentator, Joel Benjamin, to show that her
particular understanding does not take into account the fact that rate-rigging
(the LIBOR scandal) directly affects the value of the PFIs and that the
physical construction of these services by the PFIs have questionable and
concerning public-safety records, with the Fire Brigades Union warning that it
is extremely concerned ‘about
the risks posed by poor fire safety in hospitals and schools built for profit’
– the comparison with the incredible tragedy at Grenfell Tower needs no
introduction here, but the comparison is absolutely correct. In essence, we
have a system that is designed to siphon money from the public fisc, one that
is not rigorously monitored, and one that is continuously expanding.

Ultimately, the stories of NHS trusts being left without
any option other than to commit to more
debt to offer the services the public require, and stories of the families
of the poorly being charged
exorbitant rates to visit their relatives and/or friends will continue to
be commonplace. Only a small number of people can read this news and not see
the scandal and the tragedy, but unfortunately those people likely wield
considerable power or have plenty to gain from this incredible arrangement.
However, the situation reveals a more depressing situation. The birth
of the NHS is a defining and extraordinarily positive moment in British
history, and should be protected at all costs; yet, news stories like the PFI
scandal will be replaced with something else once the news cycle turns, with
very little action being taken other than the continuation of the scandal.
Rather than focusing on instances such as Brexit, or the intra-party squabbles
in the Conservative, Labour, SNP or Liberal Democrat parties, there needs to be
a sea-change in what the public react to. This particular news story
demonstrates, without doubt, that both leading political parties are complicit
in creating a scheme that is designed
to remove funds from the public into private hands – it is traditional to blame
the Conservative party, but this is a political problem, not a Conservative
problem. This story is the realisation that the State is captured by private
interests, and that the public only serve (under this system) to fulfil their
duty of providing resources to be siphoned off to the few – whether that is
ever truly realised on a large enough scale is the most important question to
ask.

Tuesday, 29 August 2017

On many occasions here in Financial Regulation Matters we have looked at two seemingly
separate issues. We have covered, extensively, the developing story of the
fraud at HBOS from the initial trial
and conviction of a number of fraudsters, to the continued and difficult fight
against Lloyds for compensation. At the same time, there have been a number of
posts concerning RBS and their abysmal performance, ranging from their continued
failings since being nationalised to their settlements
with wronged investors and shareholders. However, there are now reports
suggesting that these two streams can be neatly brought together, which
unfortunate for the inevitable victims of such an amalgamation. This author has
written extensively on the concept of oligopolistic
dynamics within the credit rating industry and, regrettably, the same
dynamics can be seen in the banking industry. The performance of the Reading
Unit of HBOS in defrauding vulnerable SMEs was simply just the tip of the
iceberg.

We will not cover the HBOS scandal here because it has been
covered extensively throughout the posts of Financial
Regulation Matters – for our purposes here, it is enough to say that the
fraud can be defined as one in which vulnerable small and medium-sized
companies where highlighted by the specific division of the bank and then
exploited, with the result being the firm was wither stripped or destroyed at
which point the fraudsters would pick up the pieces. The size of that scandal
has, arguably, not been digested by the public – probably owing to the fact
that the story has remained in the business pages of the mainstream media when
it should be on every front page. However, if it was hoped that the banking
sector would brush this scandal under the carpet then those hopes diminished
greatly last week with the news that RBS, the incredibly troubled bank, has its
own scandal ready to envelop its proposed recovery. Reports last Friday emerged
that detailed that the ‘Global
Restructuring Group’ (GRG) contained within RBS has been systematically ‘mistreating’
its clients, which included increasing interest rates and imposing unnecessary
fees for those SMEs in trouble, rather than meeting their stated purposes.
Incredibly, it is being reported that 92% of companies the group dealt with has
been treated in such a way, although the FCA were at pains to declare that the
group did not try to ‘profit
from their distress’. Whilst the accusation of fraud has not been levelled
at the group, the suggestion that no profit was sought is a difficult one to
swallow, with the statistics showing that only one in ten firms survived the
process intact, with almost seven out of ten companies remaining tied to ‘complex
loans organised by the GRG which were often too expensive to leave’ – to suggest
profit was not sought is to ignore the purpose of the bank entirely, particularly
one is such difficulty.

Another issue that stems from this leaked report by the FCA
is the supposed impotency of the regulatory framework. It has been reported
that the Bank provided only ‘narrow
compliance’ with the investigation which, although refuted by the Bank, details
at least a major conflict between regulators and the regulated. In response,
the Bank has stated that it has launched a new complaints procedure overseen by
an independent third-party and an automatic refund process for GRG customers,
although the experience of Lloyds customers should tell us that it is very easy
to ‘talk the talk’. Yet, the complains of the regulator hint at an issue that
is still to be resolved since the crisis, and that is the effect of unregulated
finance, with a spokesperson for the FCA stating that ‘many
of the activities carried out by GRG were largely unregulated and its powers
were therefore limited’. This type of narrative should instantly remind of
us of the regulatory surrender to the might of the unregulated ‘shadow
banking’ sector, which was consistently paraded as an example of the
consequences of an underfunded
regulatory framework – the need to properly fund regulators is obvious, but
the careering away from the Financial Crisis and the incessant need to show a
booming economy makes that requirement wishful thinking at this stage.

Returning to RBS more generally, this latest instance marks
the latest in a long line of negative press. The old adage that any publicity
is good publicity is simply not true, and it is likely that RBS will learn that
fairly soon – the question posed on a number of occasions here in Financial Regulation Matters is how much
more can RBS get away with? There is seemingly an accepted understanding that
RBS is too big to fail, which is supported by the crisis-era bailout, but is
that truly the case? Lehman Brothers was a massive institution and it was
allowed to fail, which means that, perhaps, there needs to be a recalibration
in our societal perception of what is truly too big to fail. However, that last
sentence is wrong, because in reality there needs to be a political recalibration, and on that front we may be waiting a
while. A recent book by Ian Fraser titled Shredded:
Inside RBS The Bank That Broke Britain, published in 2015, brilliantly describes
the incredible problem faced by the United Kingdom, in that it plays host to a
bank that is intertwined within its political and financial fibres, so much so
that its removal would be catastrophic; however, what is required is that we
keep addressing and analysing this relationship as much as possible because
accepting it will normalise the actions of this incredibly poisonous bank.
Recent news discussed how the Bank has been actively
preventing rivals from reopening branches that it has closed as an attempt
to stop the haemorrhaging of money, which has led to a number of small towns
and villages without proper access to banking services, further compounding the
problems highlighted in previous
posts concerning financial literacy and financial exclusion. Ultimately,
RBS is a problem that is growing by the day, and refusing to acknowledge that
or downplaying the significance of this incredible problem only heightens the
severity of the damage its implosion will cause – perhaps the next scandal will
see RBS on the front pages, but one should not hold their breath.

Friday, 25 August 2017

Today’s post focuses on the largest business story today which
is the news that Lee Jae-yong, the vice-chairman of Samsung and its de-facto
head, has been jailed for five years after being found guilty of bribery,
embezzlement, and perjury amongst a host of other offences. This massive news
for South Korea, however, has the potential to fundamentally alter its
environment in terms of the relationship between the massive family-owned
conglomerates that dominate the South Korean landscape, and the Government.
Yet, whether or not that comes to fruition is the focus for this piece because,
as is usually the case, a realistic assessment suggests that the favoured outcome
may not be attained.

Today’s sentencing of the heir to the sprawling Samsung Empire,
Lee Jae-yong, marks the accumulation of a string of events that began in 2016
with the investigation
into the then-President Park Geun-hye. Very briefly, Park Geun-hye, the country’s
first female President and daughter of the Military Leader and President of
South Korea Park Chung-hee, has been under investigation since 2016 for her
connection with Choi Soon-sil, the daughter of a Cult leader who grew particularly
close to Park Geun-hye but who was herself jailed in June for
three years on charges of corruption. The complicated but fascinating story is
perhaps made clearer if we understand that one of the main accusations against
Choi was that she used her political connection to leverage favours and
financial recompense for her daughter from some of the largest companies in
South Korea. The former President, who was impeached as a result of the
scandal, is currently on trial
for the same crimes, with it being suggested that country’s first female leader
could be imprisoned
for life; many have suggested that today’s sentence will make for grim
reading for Park’s future. However, the question for us is whether the
current environment of punishment being administered will be a lasting one.

Lee Jae-yong is the heir to Samsung, a massive conglomerate
that has assets of over £250 billion. In South Korea, firms like Samsung are
known as ‘chaebols’,
which are large family-owned businesses. Lee is the de facto head of Samsung
because his Father, Lee Kun-hee, has been hospitalised since 2014 after
suffering from a heart attack, who himself has not been a stranger to charges
of corruption – in 2009 Lee Kun-hee was convicted of tax evasion and sentenced
to a three-year
suspended sentence, which was subsequently pardoned
by then-President Lee Myung-bak. South Korea has had a long and often difficult history with
its chaebols, with these multi-faceted companies being ran like operations
outside of the law and general rules on a number of occasions. However, after
Park Geun-hye’s impeachment her political party collapsed and ushered in a new
political era – Moon Jae-in swept
to power in the wake of the impeachment and immediately began establishing
a hard-line against corruption in the country. On that basis, the former
President should arguably be preparing herself for a lengthy, if not lasting
prison sentence in October of this year.

Lee Jae-yong’s crimes are now clear for us all to see.
Despite his lawyers’ claims that he was not part of the decision making process
at Samsung, Mr Lee was convicted of bribery for the multiple instances of money
and gifts he provided for Choi, including a £620,000
horse for her daughter. In return, the Samsung boss had wanted Choi to
leverage her political affiliations to allow an $8
billion merger of two Samsung affiliates to go through, which would cement
his control over the group despite the shareholder protests against the move –
the merger was approved by the national pension fund, which itself is a major
Samsung shareholder (thus demonstrating the interconnectedness of South Korean
Business and Politics). Despite Lee’s fervent denials of complicity, prosecutors
succeeded in establishing
the picture of Lee being fully in control of the company and therefore his
actions, with the resultant picture being a member of the South Korean elite
attempting to leverage his position for further power, but coming unstuck by
damaging revelations. Earlier we looked at the long history that South Korea
has with its many chaebols, and that history is defined by feeble
approach to justice where the chaebols are concerned, although one onlooker
has suggested that this sentencing, if it holds up to the appeals process,
represents the smashing of the ‘too-big-to-jail’
culture that has come to define the country. Whether or not the sentencing
remains after the forthcoming appeal is another story entirely, but there are
two prevailing outcomes from today’s sentencing: on the one hand there is hope
that the seemingly impenetrable world of the chaebols is beginning to wear
away, but on the other hand there is a feeling that nothing much will change.

As usual, which outcome one ascribes to is dependent upon
one’s views on the world of business moreover. For Samsung, the future looks
only ever so slightly uncertain, with the arrest certainly not reducing its
position – its stock prices continue to rise, its revenues continues to
increase as it cements
its global position as the leader in markets like the smartphone and
computer chips markets. Experts are suggesting that the company’s long-term
future may be uncertain, with the prospect of internal
battles taking place at some point, but in all reality Mr Lee will be
released relatively shortly and will surely resume his role as the natural
successor of the chaebol. The more interesting development will be the trial of
Park Geun-hye in October, with the impending possibility of a former President
being jailed for life containing the possibility of restructuring the country’s
attitude towards high-end corruption; however, and certainly in no attempt to
provide support for Park, the story of her early life and the presence of Choi
and her Father Choi Tae-min should be considered, particularly if she receives
life in prison whilst Mr Lee receives only 5 years – what message does that
send? Ultimately, there is an overriding message from this news and that is
that, although South Korea’s relationship with big business is slightly unique,
there is still a picture to be extrapolated for other countries; politics and
big business is fundamentally intertwined,
and when we read political stories we must consider the role that big business
plays in those developments, and vice versa – the biggest difference between
South Korea and the West is that their business leaders have a more prominent
public face; apart from that, the lesson is the same.

Thursday, 24 August 2017

In today’s post the focus is on the recent news emanating
from China that the Chinese Government has introduced a cessation on foreign
investment by Chinese entities on anything over $5 million. However, recent
news concerning the potential investment in one of the world’s leading car
manufacturers suggests that the outflow of Chinese capital will not be stopped,
but rather will now carry a governmental-licence, which has the potential to
alter the dynamics of the global capital flow and, more importantly, the global
political balance.

China has long since employed different
variants of economic nationalism, ranging from Mao Zedong’s 30-year
reign to Deng Xiaoping’s radical
transformation of the Chinese State. Today’s version, led by
Xi Jinping, is part of a growing
world-wide trend but with one crucial difference from other components of
the trend like the United States or the United Kingdom; China has the political
ability to enforce its nationalistic
policies upon its business entities in a much different way than its political
competitors. Last week, in announcing to the Chinese economy its intentions,
the Chinese State Council announced that it would be implementing the latest
phase of a long-held
initiative to curb the
outflow of capital from Chinese shores. In November last year it was
announced that any investment outside of the country worth over $5m would need
to be cleared
by Central Authorities first, but this has seemingly not deterred the rate of
investment abroad. However, the ever-growing debt
crisis that is enveloping China has forced the State into action, despite
suggestion that a general
raising of corporate taxes could provide room for the State to breathe. In
the wording of the document released by the State Council, it is affirmed that
the levels of debt being incurred because of the vase outflow of investment are
now being fundamentally considered, with the effect being an immediate
prohibition (with the caveat of the requirement of a licence) of investment in
overseas hotels, cinemas, the entertainment industry, and real estate. This is
being witnessed already with the withdrawal of Wanda Group’s rumoured $1
billion acquisition of Dick Clark Productions, and the recent
ordering for Anbang Insurance Group to liquidate its foreign assets, which
include the famous Waldorf Astoria Hotel – although Anbang maintains that it
will have the final decision, the reality will tell a different story.

Apart from the need to maintain capital within China to ward
off any sort of financial crisis, the State Council makes clear that one of the
aims of the State is to encourage internal investment in initiatives like
President Xi’s signature ‘Belt and Roads’ project which, although far too
expansive to define neatly, is a massive $900
billion infrastructure initiative which aims to connect China to a host of
other countries in Asia and beyond – it is being heralded as the biggest ‘development
push’ in human history. Therefore, the need to keep investment internal is
clearly important to the Chinese state but, interestingly, it has not stopped
the rumoured attempted outflow of capital. One relatively small development
recently was the 80%
takeover of English Football Club Southampton FC by Gao Jisheng, worth a
reported £210 million – the latest in a recent
flurry of Chinese investment in football-related endeavours since President
Xi’s visit to the U.K. in 2015.
However, the largest piece of news in this regard is the rumoured Chinese
interest in the Fiat-Chrysler company, the seventh-largest
auto manufacturer.

Rumours have picked up pace recently after an official from
the Great Wall Motor Company confirmed U.S.-based speculation that a ‘well-known
Chinese automaker’ was interested in purchasing Fiat-Chrysler; the official
stated that ‘with
respect to this case, we currently have an intention to acquire’. The deal,
which if completed would represent one of the largest auto-based deals a
Chinese company has taken part in, would be very-much needed by Fiat Chrysler
as it struggles to keep pace with its requirements to stay competitive in an
extremely competitive marketplace, and comply with emissions regulations and
the need to develop technologically. However, Fiat Chrysler was forced to admit
that it has not been the subject of a takeover bid, which was closely followed
by Great Wall Motors declaring that it had not entered into discussions with Fiat
Chrysler, which immediately sent Great Wall’s stocks down
in price. At the time of writing the deal is considered as very unlikely to
proceed, but whether that is because of the conditions in China is up for
debate – there certainly seems to be a persistence in Chinese appetite for
foreign investments.

Ultimately, however, the position of the Chinese State over
its business entities will dictate the outcome. The impending threat of a debt
crisis, when placed in conjunction with the Belt and Roads project which will
cement China’s position as a global leader, will
take precedent if needs be – and it is likely that it will need to be. The
ability to position the Government as the provider of licences for foreign
investment means that the Chinese Government can attempt to ward off what is a
real and imminent problem with regards to its levels of debt being incurred.
The IMF
has been clear in its warning for China, noting that levels of private-sector
debt and the use of complex financial instruments are putting the Chinese
economy at great risk, with the world having a real understanding of what those
risks are after seeing the U.S. and the U.K. fall to the same risks – however,
it is unlikely that China will be deterred by this. In reality, China’s growth
is incessant and based upon a sentiment of this current phase being representative
of China taking its place amongst the global elite, which it has every right to
do. China’s political structure allows it to take actions that Western
countries (theoretically) only take during a crisis, which may mean that the
situation will not develop as Western-based onlookers like the IMF believe it
will. Either way, the future for China’s economy will have a massive effect
upon the global stage, but whether that effect is positive of negative remains
to be seen.

Monday, 21 August 2017

Today’s post looks at the news that Johnson & Johnson (J&J), the massive
pharmaceutical, medical devices and consumer goods company, has been ordered to
pay a massive $417 million to a claimant regarding the company’s failure to ‘adequately
warn consumers’ about the cancer-related risks of one of its most famous
products – talcum powder. In this post the focus will be on the string of
claims that have resulted in awards for the claimants against J&J and what
it may mean for the company and its reputation.

Simply put, scandal is never far away from this particular
field of medical science and its connection to the public. There have been a vast
number of cases over the years which can be described as ‘corporate
scandals’, with many becoming etched into the public consciousness. In the U.K.
(although the effects were certainly not restricted to the U.K.), perhaps the
most famous corporate scandal in relation to the medical sciences field was the
case of those affected by the morning sickness drug Thalidomide.
The effects of the drug, which after retrospective testing 50 years later was
found to be caused by a component of the drug preventing
the growth of new blood vessels in embryos, included the child suffering
from a number of deformities, with it being stated that the stage at which the
pregnant woman took the pill determined
the nature of the deformity suffered by the child. This horrific instance
of corporate
crime and failure, which casts a long
and persistent shadow upon society, is just one of a number of unfortunately
memorable instances of corporate failure in this field. In France, the Poly
Implant Prothése (PIP)
scandal which involved the switching of medical-grade silicone for breast
implants with industrial-grade silicone resulted in nearly 50 ruptured
implants, a wave of litigation and the dissolution of the firm. In the United
States, the recent
case of the New England Compound Centre and its role in the widespread
dispersion of medicine that, because of severely lax standards, resulted in
over 700 people being infected with Meningitis with 64 people dead. A recent
case against the owner of the centre – Barry J. Cadden – resulted in his acquittal
on 25 counts of second-degree murder, but conviction for racketeering and
fraud, for which he was sentenced to 9
years in Prison. These clearly are just some of many examples of corporate
transgressions that have led to drastic effects upon public health. If we look
at J&J however, we see somewhat
of a mixed situation.

In the 1980s, J&J were widely praised for their reaction
to a similar situation. In 1982 in Chicago, 7
people died as a result of taking pain-relieving ‘Tylenol’ capsules that
actually contained potassium cyanide. Yet J&J, who has manufactured the
drug, immediately recalled 31 million bottles of the drug and replaced them in
a safer tablet-form – it is not known for certain how the drugs came to be
tampered with. The company earned
praise for its rapid response and forthright sharing of information with
the public, an approach which has been discussed
widely when looking at crisis-management strategies. Yet, if this period
represented a positive view of J&J (relatively speaking), then recent
events paint a very different picture. The products in question contain talc, a
mineral
which is made of magnesium, silicon and oxygen. The mineral is heavily used
in a number of J&J products for its ability to absorb moisture – popular products
include baby powder and facial powders. However, the American Cancer Society
confirms that in its natural form ‘some
talc contains asbestos’ which, even though the use of asbestos has been
widely prohibited, has still seen the link between the use of talc-based
products and cancer claimed and examined on a near-consistent basis. In the
early 1970s a possible
link between talc and ovarian cancer was established by British scientists,
which as a study was followed by further studies in the ensuing decades that claimed
women were three
times more likely to contract ovarian cancer when they used talc-based
products near their genitals. Although J&J were made aware of the associated
risks by their suppliers in 2006, the company refused to attach warnings over
its usage and that is the central claim to litigation concerned with this
issue. In 2006
a federal jury found that J&J should
have warned consumers of the risks (without awarding damages), and in recent
years the company is facing a wave of
litigation. In 2016 the company was ordered to pay $72 million to the family of
Jacqueline Fox, $55 million to Gloria Ristesund, $70 million to Deborah
Giannecchini, and in 2017 $110.5 million to Lois Slemp and now $417 million to
Eva Eheverria; it is suggested that over 1000
women will claim against the company. The names of the women who have been
awarded damages was not listed to ignore the details of their individual cases
(far from it) but to highlight the remarkable situation that, rather
incredibly, just keeps developing. The company responded by stating that ‘we
will appeal today’s verdict because we are guided by the science, which
supports the safety of Johnson’s Baby Powder’, with the company using
tried-and-tested legal defences like the protection offered by the U.S. Supreme
Court that states that lawsuits must be confined
to states where the alleged wrongdoer i.e. J&J is based. Yet, the
recent ruling and the sheer size in relation to previous awards surely hints at
a change in the offing.

Ultimately, the trajectory of awarded damages may reveal for
us the eventuality that J&J seemingly does not want to face: it is far from
inconceivable that talc-based products will be wholly, or mostly prohibited. This
case represents a slightly different case in that the divergence in medical
opinion and evidence is allowing the scandal to continue unabated, whereas
other scandals were arguably much clearer. However, it is contested here that
this scandal is just as clear, and the result of the scandal should be
forthcoming immediately: the correlation, at the rate it stands at now, between
the use of talc-based products and ovarian cancer, is more than enough to take lasting action. The question for
regulators across the world – this is not just an American problem – is how
many people, and women mainly, have to die or contract ovarian cancer before
serious action is taken? Another thousand? Ten thousand? The losses that
J&J will incur with the prohibition of one of their famous products should
have no bearing whatsoever on the
decision to take action and prohibit the sale of talc-based products;
unfortunately, the power of the corporation is well and truly at play in this
case.

Today’s post focuses on the news that the Co-operative Bank
(the ‘Co-op’ bank) has had a £700 million rescue package approved by its
members today. The bank, which has experienced a decline in its fortunes since
the Financial Crisis, has presented this recent package as a viable method of
stemming the bleeding that goes back to its merger with the Building Society,
Britannia, in 2009. The obvious question is whether this latest attempt to halt
the slide will be effective, or whether the associated 145-year history looks
like it will be coming to an end in the not-too-distant future.

As stated above, the co-op bank can trace
its roots back to the Co-operative Wholesale Society of Manchester, which
was established in 1872. However, this British institution as experienced dire
times of late, and that is commonly traced back to 2009 when the company merged
with Britannia, a large Building Society; the deal was heralded as the ‘next
step in the renaissance of the co-operative and mutual sector’. Although
job losses were announced shortly after in 2011, the promoted health of the
company looked good when the Co-op group announced that it was bidding
for 632 branches from Lloyds Bank in August 2011, although that perceived buoyancy
was dashed shortly afterwards when the regulator overseeing the attempted
purchase warned Lloyds that the Co-op group did not have the funds to
underwrite the proposed deal. After George Osborne, our
old friend, had championed the deal as creating ‘a new challenger bank’,
the group announced a massive £600 million loss the year later, which preceded
the withdrawal from the bidding process for the branches of Lloyds. Since that
time, the bank has suffered disaster after disaster, ranging from its chairman
being filmed arranging to purchase
illegal drugs, to the bank’s declaration that there was a £1.5
billion hole in its accounts which, for a bank this size, is usually
terminal. Recent news confirms the deterioration of the ethically-minded bank,
with reports (from the Competition and Markets Authority) suggesting that it
was not clear enough when informing
customers about overdraft charges – so, not very ethical on that front;
this is likely just one of the many reasons why over 25,000
customers left the bank in the first half of this year alone. Yet, today’s
news may be seen as a positive outcome from recent negotiations regarding the
bank’s health, but in reality it may be anything but.

The deal with the bank’s creditors, which consists of a
number of large investors like BlueMountain Capital, Silver Point Capital, and
GoldenTree Asset Management, has been tentatively framed as a pathway to
success by the bank, with the CEO claiming that the second
half of 2018 and 2019 will represent periods of growth for the company.
Whilst the deal, which will see investors swap their bond holdings for shares,
may be being tentatively promoted, the bank itself suggests that more job
losses may be imminent; also, whether the deal will be enough is another
matter entirely.

Ultimately, there is a debate
regarding whether the privatised bail-out represents a desperate attempt to
survive, the right course of action, or more broadly whether it suggests that
the proposed reduction of the too-big-to-fail safety net is working i.e. banks
will look to private resources for assistance. One commentator suggests that the
broader effects of this deal on the discussion regarding the regulatory
approach to bail-outs should not be overstated, and that is correct – the co-op
bank is not your usual bank; despite the introduction of hedge-funds and the
like into the equation, the bank is still an institution driven by core
principals which, theoretically (and, in all honesty, practically) make their
client base ‘stickier’ than other institutions’ client bases. There is a
potential that the £700 million finance package may help the co-op banks
situation, but at the moment the bank is particularly
at the mercy of its environment, and the current environment is extremely volatile.
Whilst it is hoped that the bank remains because, as banking cultures go, it is
important that ethical banking exists, the exposure to the elements is a real
concern. With the U.K. still to formally leave the European Union, and the
erratic situation in the United States, the co-op bank needs some unexpected ‘wins’
and soon if it is to last another 145 years – in 2017, these ‘wins’ are
apparently few and far between.

Thursday, 17 August 2017

Usually here in Financial
Regulation Matters, the focus of posts is on the world of business and
usually its connection with the world around it – business, rather obviously,
is part of a much larger societal picture, particularly in this modern era. The
focus of the posts is usually upon business and/or regulatory developments,
which are then assessed against a broader backdrop. However, today’s post
represents a slight departure from that approach in that it responds to the
recent wave of headlines praising corporations for taking a stand against the
developing situation in the United States regarding President Trump and his
views towards outwardly racist groups. For this post there is only one question
that is of concern, and that is whether the praise being showered upon
companies like Apple, Spotify, and Go Daddy is correct.

The first wave of public, and specifically media praise for
companies began after a number of CEO’s left
the President’s advisory councils. Before the President officially
disbanded the ‘Manufacturing Jobs Initiative’ and the ‘Strategic and Policy
Forum’, he had suffered a number of high-profile losses in the form of Kenneth
Frazier, the head of pharmaceutical giant Merck, and the CEOs of Under Armour
and Intel. According to media reports, the actions of the members of the
Strategic and Policy Forum, in informing the administration that the vast
majority would be standing down, precipitated
the closing of both initiatives. Whilst the President’s reaction of ‘grandstanders
should not have gone on’ the initiatives anyway is to be expected, the
negative reaction to his failure to repudiate the actions of far-right
activists in Charlottesville at the weekend continued unabated, with JP Morgan
Chief Jamie Dimon ‘strongly
disagreeing’ with the President’s handling of the situation, Apple’s Tim
Cook warning the President that ‘hate
is a cancer’, and General Electric’s Jeff Immelt leaving the initiative
because of the ‘ongoing
tone of the discussion’.

The despicable murder of Heather Heyer at the weekend has
forced deep-rooted issues to the forefront of the public consciousness once
more. However, if we take a step back and look at the situation, the situation
is damning for corporations. Before the weekend, the content of The Daily Stormer was still illegal as
it inspired hate and violence; yet it remained freely available via social
media and the internet. The hate-filled songs on Spotify were still available.
The leading corporations were not increasing their donations to the SPLC or the
Anti-defamation League. Yet, the most damning realisation is that the
viewpoints of the President, viewpoints that these business leaders were citing
as the reason for their abandoning of him, were not new. Before the weekend,
there were so many signs that Donald Trump held the views that he reiterated
over the last week, but there was little disgust from business leaders then.
There was no disgust when he filled the White House with people like Steve
Bannon. The travel-ban on people from Muslim-majority countries caused angst,
yet they did not abandon him. His repeated
links to far-right and racist groups like the Ku Klux Klan has not deterred
their support, whilst historic comments like ‘laziness
is a trait in blacks’ have been forgotten about. The reason for this is simple,
and calls into question any praise levelled at the actions of corporations.
There has been some analysis
in the media that looks at the economic effect of Trump’s relationship with
these CEOs, and therein lies the problem; these corporations are not people.
When they disregard the actions of Donald Trump who, throughout the course of
his campaign made no secret of his ambition to sow division and hatred amongst
the fabric of America, they do so to maintain influence within the political
component of the State – as corporations, they must do this. As corporations,
they must seek to look after themselves first before they consider any societal
issues, so the theory goes, and that takes
the form of lobbying for preferential treatment by way of reductions in tax or
subsidies etc. Whilst some who are reading this may believe that this is
acceptable, as is their right, we must remember that it is corporations who are
preserving Trump’s power and, in reality, are the main reasons for his
successes in the first place. Their retrospective disgust for hate and division
needs to be contextualised properly, and that will start by considering the
pro-corporate headlines of their removal of sites like The Daily Stormer – it should not take the murder of an innocent
woman to push corporations to flush out such avenues of hate. It should not
take the incredible footage that went all around the world of Nazi flags being
paraded through an American city to prompt corporations to do what is right and
publically disavow a President who does not disavow those flag carriers.
Corporations have a lot to answer for, and stepping down from forums created by
the President will not change that.

Wednesday, 16 August 2017

Today’s post looks at the news that KPMG has been fined by
the U.S. Securities and Exchange Commission (SEC) for ‘misinforming’
investors about the value of a certain company. This follows the news from the
U.K. where the Financial Reporting Council (FRC) have fined
PricewaterhouseCoopers (PwC) for ‘extensive
misconduct’ relating to its audit of a professional services group. This
recent flurry of regulatory activity has led some to discuss the ‘growing
concerns’ regarding the quality of the Big Four’s output, but in this post
we shall see that it is a surprise that this behaviour is not expected of the Big Four, and that the
regulatory response should certainly
be expected.

Only very recently here
in Financial Regulation Matters did
we discuss the ever-growing problem of accounting firm quality standards, with
it being suggested that Andrew Tyrie may be looking to establish some sort of oversight
board to further regulate the accounting industry. These suggestions followed
on from what is being imagined as a new regulatory wave coming the accounting
industry’s way after Brexit, but recently there have been a number of instances
which suggest the Big Four firms – PwC, Deloitte, Ernst & Young, and KPMG –
are beginning to lessen their standards on a systemic level (this will always
be the case with a financial oligopoly). In May of this year, the FRC handed
out its highest ever fine, this time to PwC, to the tune of £5m.
This was for serious failings in the auditing of Connaught, a social housing maintenance
group, for which the FRC proclaimed that it has ‘severely reprimanded’ PwC,
with the Connaught fine coming just a year after the regulator had to fine PwC £3m
for the same thing for its audit of Cattles, a financial services group. Yet,
rather predictably, that severe reprimanding had little effect, and now just 2
months on from Connaught, the FRC has fined PwC a new record total of £5.1
million for its audit of RSM Tenon, a professional services group that went
into administration in 2013. Strangely, the regulator continued with the
narrative that the fine represented a ‘severe reprimand’ again, with PwC
admitting to five separate instances of misconduct – perhaps the regulator has
a new definition for ‘severe reprimand’. This all follows on from fines for PwC
for its role in a recent audit of Merrill Lynch, and also the Ukrainian lender
PrivatBank; clearly, the reprimands are not working.

The growing
concerns regarding the quality of the Big Four’s output have been flagged
up in the media because of the recent fine given to KPMG by the SEC, totalling $6.2
million. The fine, which was in relation to the firm’s valuing of Miller
Energy Resources (a Tennessee-based oil and gas company), punished the auditor
for ‘grossly overstating’ the value of the company, even to a point of
overvaluing certain assets by more than 100 times their actual value (!). As
part of the fine, the auditor agreed to improve its quality control mechanisms,
but the ludicrousness of that statement, coming from a member of the Big Four,
beggars belief. Yet, these fines, and the sentiment that is attached to them,
provide an excellent demonstration of the problem at hand.

If we look at the companies who the auditors have failed to
properly audit, there is a distinct correlation. These ‘financial services’
firms are prime targets for the Big Four’s array of ‘consultancy services’,
which serve in the same way the Credit Rating Agencies’ ancillary services do,
in that the additional services are worth much more to the auditors than the
actual audits themselves. This is a common problem within the world of
financial gatekeepers, and one that is widely
recognised. Yet, in the decisions of the regulators above, the issue is not
addressed at all, and all that we see are nominal fines and throw-away comments
like ‘severely reprimanded’. Speaking in the Financial Times, Emeritus
Professor Prem Sikka stated that ‘a
£5m fine is less than half a day’s work for PwC’, and he is absolutely
right – there is simply no way that this can be regarded as a deterrent. So, if
the fines cannot be counted as a deterrent, then what are they? In essence,
these fines represent a pacifier for the public, and that regulatory must stop as we oscillate away from the
Financial Crisis.

In the aftermath of the Crisis, the Big Four were
criticised, but that criticism could hardly be heard against the wall of
criticism aimed towards the banks, mortgage companies, and rating agencies (and
rightly so). It needs to be established more clearly and more often that the
auditors had a very important role in facilitating the crisis – this should be
a given, given their centrality to the financial marketplace. Yet, this is not
really the case, and although the transgressions of the Big Four are steadily
creeping back into the public consciousness, where they belong, there is a
growing problem on the horizon. New rules which dictate that large firms must
put their auditing accounts out
to tender every ten years has seen the Big Four switch their focus from the
auditing section of their business (which is, by far, the least lucrative) and
turn their attentions towards the consultancy side of their business (which is,
by far, the most lucrative). This attachment to the firm’s consultancy arms is
directly at fault for a number of the failings of the industry, in that it
makes sense that the firms would pressure their clients to take consultancy
services, or vice versa clients can impart influence upon the threat of taking
their business to an oligopolistic competitor. The theoretical deterrent is
that the firms would not want to risk either their reputation, or their
standing with the regulator, but neither of these apply – the oligopolistic structure
protects them from competitive pressure, and the regulators, in levying £5m
fines, confirm for the auditors that they will not be punished for
transgressing. Simply put, until the regulators join reality and begin to fine
the firms excessively, there will be
no change in the culture of these societally-vital financial firms.

Saturday, 12 August 2017

Today’s post covers a topic that will be of interest to a
lot of people all across the world. According to figures from the last couple
of years, the Premier League – the highest football league in the U.K. – is massively
popular, and its rates of growth in terms of expansion, income, and
transmission across the globe grows year on year. The Premier League, which
sells the ability to televise its games to multimedia companies like Sky or BT,
is preparing to auction off the rights to televise its product at the end of the
year, with the expectation that this round of auction will produce new record
amounts of revenue. Whilst that is likely, there are external factors that may
affect this incessant growth, and those factors are the focus of today’s post.

Simply put, the ‘Premier League’ has been an incredible
success since its inception in
1992. Figures
taken from the last few years confirm this, with the Premier League being
broadcasted to 156 countries with 4.2 billion fans watching every week. Since
the league’s inception in 1992, its development has been synonymous
with television rights, and the modern era is no different. In this post we
will focus on the British rights mainly, because the dominance of the British
marketplace in the business model of the League is demonstrated when we
consider the prices that are being paid to broadcast the matches. In 2015, the
Premier League auctioned off the rights to broadcast its product, and the
traditional frontrunner in the auction was Rupert Murdoch’s Sky brand, one
which has been synonymous with the Premier League since it began. The auction of rights are
divided into ‘packages’ i.e. certain packages have different classifications of
matches, with which the broadcaster can broadcast at peak times etc. (one may
notice a slight similarity with the securitisation process!) and in 2015 Sky
paid £4.2 billion for five of the seven available TV packages for a period of 3
years, with BT paying £960 million for the other two packages. BT stands as Sky’s
only competition within the U.K. in a marketplace which Sky has thoroughly
dominated and seen off every competitor so far (Setanta Sports, ESPN), but in
difference to their predecessors BT has developed quite an extensive, albeit
expensive approach to challenging Sky in this particular market – BT recently
acquired the rights from Sky to air the UEFA Champions League and UEFA Europa
League for a record price of £1.2
billion (almost £300 million more than what Sky had paid previously). This
inclusion of heavy-hitting competition is causing particular problems for Sky –
the theory goes that it helps consumers, but there is no evidence for that in
reality – as BT continues to bid way over the odds for packages that Sky cannot
even contractually bid on; a former Sky executive claims that BT’s strategy is costing
them hundreds of millions of pounds and can easily be rectified. This
understanding has led to analysts
predicting that the next auctions rights will see Sky pay an extra £1.8 billion
on top of the £4.2 billion it paid in 2015 just to retain its standing, which
of course has the Premier League bosses purring – it is likely that the recent
increase in transfer fees witnessed in the Premier League in the past two
seasons alone (Paul
Pogba for £89 million and Romelu
Lukaku for £75 million) will be dwarfed by clubs spending the increased
revenues. However, the threat of incoming competition from tech heavyweights Apple
and Amazon has seen fears of an explosion in bids during the auctioning
phase become palpable within Sky and BT recently, with the fear being that the
companies will have to have their influence reduced – Sky are already making
noises that they will pull out of some packages and instead focus on their
other offerings (Drama offerings like Game of Thrones and Riviera), whilst BT
Executives are also downplaying
the notion of BT attempting to challenge Sky’s dominance. Whilst it may be that
the explosion in costs, particularly in line with waning
viewing figures (despite the recent
ban on illegal streaming) is proving simply unsustainable, it may be the
case that the wider world of business provides a clearer reason for the
companies’ hesitance to engage each other.

Starting with BT, we have looked before here
in Financial Regulation Matters at
the accounting scandal that began in Italy but spread to affect a large part of
BT’s business. As a result of the accounting scandal in Italy which saw the
company write off more than £530 million, it also paid Deutsche Telekom and
Orange £225
million to avert litigation resulting from the fraud, which in turn has led
to 42%
drop in their profits; simply put, now is not the time for BT executives to
wage war with Sky over broadcasting rights to football matches. Sky, on the
other hand, are having problems of their own. Rupert Murdoch, whose 21st
Century Fox Company owns 39% of Sky now, is in a battle with British
politicians and regulators with regards to his attempted takeover of the Sky Company
– the claim is that the merger will afford Murdoch too much influence over
media in the U.K. owing to his ownership of Fox, Sky, and a number of
newspapers. Murdoch’s proposed £11.7 billion takeover demonstrates the
willingness for the deal to happen, but also the state of flux that Sky is
currently in; it can also not afford to engage in a battle with BT or any of
the tech giants. How these corporate issues will develop will determine the
future of the Premier League.

In short, the individual business concerns of both Sky and
BT mean that whilst this next auction at the end of the year will see the price
rise again, the next auction may see that rate of growth decrease. The noises
coming from both camps indicate a potential shift in sentiment – the cost of
broadcasting the Premier League is, potentially, getting to the point where it
no longer makes commercial sense to win the auction for the rights. However,
the squabbling between the two companies, which plays right into the narrative
of pro-market thinkers who proclaim that competitive forces are better for the
end users, is in fact producing absurd results. At the same time the Premier
League is recording record rates of income, the end users – the fans of the
game – are seeing the prices they pay to watch just some of the matches (not all matches are televised) rise exponentially, the
price of match-day tickets rise, the price
of associated merchandise rise, and also there is evidence that there is
only a very small percentage of that profit being reinvested in the game at
grassroots level. When we consider that all this coincides with the public
experiencing a recession, it is little wonder that the past few years have seen
a number of fan
protests against the growing costs. There is an old saying that ‘you can
fleece a sheep many times but you can only skin it once’, and it appears the
leaders of the Premier League have not heard it – the incessant abuse of the
public’s affection for the game of football has lured the Premier League bosses
into a belief that that adoration is unconditional – only time will tell if
this is the case, but the noises coming from Sky and BT suggest that they are
reaching a point of saturation. Then, one of two things will likely happen; both
prices and demand will begin to plateau, or competitive forces will encourage a
bigger player to enter the marketplace and continue the ever-present rate of
growth – the potential inclusion of Amazon and Apple to the marketplace does
not sound good for football fans.

Friday, 11 August 2017

On quite a few occasions here
in Financial Regulation Matters we
have focused on the growing credit bubble and its potential effects when it
collapses. In today’s post, we are going to continue this assessment by looking
specifically at the situation in the United States, which will encompass an
array of reports and studies that discuss an ever-growing problem that is
beginning to set records. As we often do in Financial
Regulation Matters, we will position this discussion within a much wider
context and discuss how the proximity of this bubble to the last Crisis is
particularly worrying, but also we will look at how impotent the system is at
actually constraining it, with the result being methodologies that are moving
into absurd territories.

We have discussed the rising credit problem on a number of occasions
before, but mostly in terms of the warnings
posed by British regulators. However, looking at the global picture reveals
a much more dangerous situation in that the world’s leading economies are
witnessing record levels of debt. In China the current ratio of credit in
relation to GDP stands at an incredible 260%,
which has led to an influx of analysis that essentially confirms that a bursting
of that bubble is almost inevitable, but would cause devastating shockwaves
around the world. China’s increasing consumer and governmental debt represents
the pinnacle of a growing systemic problem, one which has seen the levels of
debt issuance by countries and major supranational organisation almost
double since the Financial Crisis, with organisations like the E.U., the
Asian Infrastructure Investment Bank and the World Bank all entering the
capital markets in an attempt to raise massive amounts of resources for their
needs. Yet, if we are looking for a massive pile of debt then we need not look
further than the U.S.

It was reported recently that the rate of outstanding consumer
credit-card debt (just credit cards) has recently surpassed the record set
before the onset of the Financial Crisis by reaching $1.02
trillion. Then, in other news, an analyst from UBS has recently been
discussing how there is a $1
trillion bubble of corporate debt in the credit markets that have been
fuelled by institutional investors being driven to speculative-grade credit in
the wake of decreasing yields from bonds such as Treasury Bonds. Student loans
in the U.S. are outstanding at an incredible $1.4
trillion, outstanding loans on auto-loans stand at $1.16
trillion (particularly sub-prime auto-debt), and all of this is operating
under the umbrella of the impending impasse concerning the raising of the
national debt ceiling in the U.S. – Treasury Secretary Steven Mnuchin has been
warning Congress that levels will need to be increased, using the Civil Service
Retirement and Disability Fund as the emotional
black-mail battering ram to get his way – a debt ceiling that now stands at
$19.808
trillion and one that will be renegotiated in September of this year. It is
clear then that the U.S., like many modern countries, is addicted
to debt; yet, the question of how to reverse this addiction is proving as elusive
as ever.

During the campaign trail Donald Trump proclaimed that he
would end the credit-related threat facing the U.S. in 8
years by fixing what he saw as imbalances in trade with other countries
(something which he suggested would be facilitated by tax cuts for the rich);
whilst we can write that statement off as one of the many statements that have
or need to be written off from Trump, the behaviour of Trump is a significant
indicator of the chances of finding a solution. The reaction
to the highs of the stock market (before the North Korea issue hit the
headlines) demonstrated a massive u-turn from his election rhetoric, and also
signified the need to make the absolute most of any perceived ‘win’ owing to
the turmoil that is consistently attached to his Presidency. However, as the
hubris of a booming stock market begins to recede, the reality
of the political and economic situation becomes ever clearer, and Trump is
left with the reality that the debt levels are rising to obscene and record
levels on his watch (amongst an array of other problems). As with most elements
of the situation, there has been no inclination that a solution is being sought
or considered, so if we take a step back and look at the totality of the
situation, we see that the President is deciding to create a diversion rather
than deal with the issue at hand, and that ‘diversion’ is North Korea.

Though there is no need for a qualifier here, mainly because
followers of Financial Regulation Matters
already know that the underlying sentiment within every post makes clear that
following the promoted opinion of mainstream media is a fool’s errand, the divisiveness
of the North Korea issue should not cloud the reality of the situation. To
begin with, the incredible rhetoric
we are hearing from a sitting U.S. President is having the desired effect in
that the mainstream media’s adoption
of his frankly ludicrous rhetoric is resulting in increased
levels of fear regarding North Korea and the usage of nuclear
weapons more generally. Though the ‘politics
of fear’ as a concept should be well known, its usefulness still remains,
with Trump relying upon it and
especially when his position or abilities are in question. Almost none of Trump’s speeches, or his
incredible tweets, have an air of peace or calm, with all outputs being based
on fear or division and, with no easy ‘wins’ in sight, it appears that
Trump has gone to his, and arguably America’s favourite imperialistic
play-book. Trump’s adoption of the invasion and militaristic narrative is
one that has served a number
of leaders throughout history (not just American history) extremely well,
but if we consider the large number of experts who have been emphatic in their
analysis that North Korea does not actually pose the threat that it (arguably by
way of survival) and Trump (arguably, for the same reason) advertise, then the
reality of the situation comes into view. Rex Tillerson, the U.S. Secretary of
State has been almost
dismissive of Trump’s warmongering, strategically-vital aircraft carriers
are in fact leaving
the region, and the Brookings
Instituteconfirms that the threat posed by North Korea is certainly
not what Trump and his supporters suggest. Whilst one must acknowledge the
dangers of North Korea, the elevation in rhetoric in fact paints the U.S.
President as the greater threat to world peace, a threat that is based upon levering
the might of the U.S. to coerce what are, in effect, third-world countries and
in doing so move the global narrative to one that the U.S. President can affect, rather than one that he cannot.

Ultimately, that sentiment of narratives that can be affected is perhaps the most
important one to consider when we are being bombarded with the ludicrous
sentiments like unleashing ‘fire
and fury’ and reminding North Korea that the U.S. is ‘locked
and loaded’. These statements are simply not befitting of such an
established and revered office, but they are indicative of a desperate attempt
to shift the narrative. Yes North Korea needs to be challenged, but stifling
the economic lifeblood of the country and then reminding them that their people
can be ‘destroyed’ is not only unwise, it is perhaps damaging the position of
the American government irreparably. Whilst dialogue with North Korea rather
than in increase in militaristic tension is needed, the issue serves as a
diversion from the fact that Trump is leading an administration that has no
idea of how to address the incredible economic situation threatening America on
a daily basis. The ease at which Steven Mnuchin offered up the support of
civil-service workers as a sacrificial lamb and bargaining chip against the
U.S. Congress is demonstrative of an administration whose answer is simply ‘more
debt please’ – the danger for us all, however, is if Trump’s slight-of-hand,
which he no doubt considers a safe option, backfires, is evidently clear; the
sentiment of ‘buyer’s remorse’ on both sides of the Atlantic is almost
palpable.

Wednesday, 9 August 2017

In today’s financial news, the Deputy Governor of the Bank
of England – Sam Woods – said that the Bank would see its regulatory capability
stretched in the wake of the U.K.’s secession from the E.U. to a point that
would demonstrate a ‘material
risk to [the Prudential Regulation Authority]’s objectives’. The basis for
Woods’ suggestion is that the potential loss of financial ‘passporting’ in the
wake of Brexit would both result in dispersed regulatory entities, and also an
influx in companies needing to be regulated due to the removal of the ability
to essentially outsource the regulation of an entity to another ‘competent
authority’. Whilst this point is worth assessing, and this post will briefly do
that, it is also worth taking a broader look at the state of the U.K.’s
regulatory framework in terms of its capability.

Sam Woods’ comments regarding the ability of the Prudential
Regulation Authority (PRA), the regulatory arm of the Bank of England, were
extremely direct. Woods further emphasised that ‘we
may have to make some difficult prioritisation decisions’ in the wake of
the differing dynamic created by Brexit, which comes as a stark warning if we
consider that it is those changing dynamics that may (or, more likely, will)
encourage speculation, a reduction in quality controls, and so on. The nature
of Woods’ warning is based on the increased risks that would accompany the diversification
of financial service providers across Europe (we have spoken before here
in Financial Regulation Matters about
the movement of sectors of financial service provision across a number of
countries) in terms of the reduced
ability to hedge risks, but also on the increased confusion that will
emanate from contractual confusion, as well as the ‘extra burden’ that may come
from the repatriation of a number of companies who are regulated by other
financial regulators across Europe. However, one onlooker has described how ‘the
only encouraging news’ is that the Bank has requested only an extra £5.4
million for its ‘Annual
Funding Requirement’ – as the PRA is funded by the regulated entities –
which would take its total funding for 2017/18 to £268.4 million. Yet, a
question that could be asked is does this news really count as encouraging?

If we begin by looking at the operating budgets of the other
financial regulators in the U.K., it will be possible to obtain an
understanding of the tools available for regulators with regards to their
mandates to regulate and maintain order in the marketplace. Starting with the
Financial Reporting Council (FRC), whose role it is to set standards for
auditing firms and also help develop the U.K.’s Corporate Governance Code, the
news is hardly ‘encouraging’. The FRC is tasked with regulating the accounting
industry, amongst other things, which means that it must aim to insert its
dominance in a market that is dominated by
four firms that are serial offenders; as of 2015,
the FRC faced an oligopoly that had a combined income of over £8.5 billion
which, when combined with the pressure of providing regulation for seven major
bodies responsible for registration and education standards, and conducting
well over 1,000 visits per year, the operating budget for the FRC of £36
million for 2017/18 does not add up.

The Financial Conduct Authority (FCA), which as a regulator
is tasked with regulating over 56,000 businesses, 18,000 of which count the FCA
as their prudential regulator, has a defined aim of protecting
consumers, financial markets, and also to promote competition. Yet, for this
vitally important regulator who have a massive task ahead of them, their
proposed budget for 2017/18 stands at £475.3
million, representing just a rise of £5 million from the previous year. The
Serious Fraud Office, although not technically a ‘financial regulator’ –
though, as we know here
in Financial Regulation Matters, are
an extremely competent body despite the aims of Theresa May – currently has a budget of £54 million, despite
garnering over £460 million in fines since 2014. The details of all of
these budgetary breakdowns are available through the links provided, and it is
worth noting that most of these budgets come from levies on the regulated
entities. Yet, there is a glowing issue that seems to be ignored more
generally.

These regulators, just in regards to the U.K. alone, are
tasked with regulating a marketplace that operates in the billions, if not
trillions, of pounds. They are tasked with preventing the pervasive and
unethical culture that struck in 2007 from happening again, and must balance
this task in relation to a wider picture that is defined by an economic
downturn that perseveres over the years (the credit bubble is an excellent
example of something ‘external’ that these regulators must account for). They
do all of this with a combined budget of just over £800 million a year which,
when considered in these aggregated terms, is ludicrous. It is ludicrous because
we know, beyond doubt, that markets left to themselves will wreak havoc. It is
ludicrous because the effect of lax
regulation is in front of us every day when we see the increased use of food
banks, increased poverty, illness, and depravity. Yet, the small increase in
funding required by one of the most influential regulators in the country is ‘encouraging
news’ – it is not. What is required is one of two things, and either will
suffice. Firstly, and this option is the most righteous, regulated firms should
see the amount they have to contribute increased substantially, and should see this increase enforced by legislation.
It is not acceptable to have the companies’ contribution limited whilst the
public’s contribution is unlimited. However, the alternative to this is that
the public, via government spending, substantially increase the operating
budgets of the regulators. Whilst this may sound distasteful, it is a social
hazard to have financial regulators underfunded, and the cost of providing this
extra funding is far less than the cost of rectifying the damage caused by underfunding
- the haphazard bonanza we saw in 2008 is a testament to that. Ultimately,
there needs to be a societal shift away from the altar of economics. This discipline
is extremely useful to society, but at its heart it discounts the effect of the economy – the detachment
involved in theories like ‘the economic man’
is fundamentally constraining societal
development, and only when that mode of thinking changes shall we see a
reduction in the social harm associated with modern finance.

Contributions are welcome to this blog. If you would like to contribute regarding any area of financial regulation, then please feel free to email me and submit your blog entry. The content should be concerned with financial regulation, and why it matters, but this is broadly defined. The blog is open to all who are professionally concerned with financial regulation, which may range from an Undergraduate Student interested in writing on the subject, to Professors and industry participants.